Sears Holdings Reports First Quarter Results
Sears Holdings Corporation ("Holdings" or "the Company") (NASDAQ: SHLD) today reported net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006, compared with a net loss of $9 million, or $(0.07) per diluted share, for the first quarter ended April 30, 2005. The prior year results include a $90 million charge due to the cumulative effect of a change in accounting for certain indirect overhead costs included in inventory. Excluding the change in accounting, the prior year first quarter net income was $81 million, or $0.65 per diluted share. The improvement in first quarter 2006 earnings reflects improved profitability at both Kmart and Sears Domestic, largely due to reduced expenses.
"While we're pleased with the progress we're making, we continue to look for ways to be more efficient and effective in our business," said Aylwin Lewis, Sears Holdings' chief executive officer and president. He added, "With a goal of dramatically improving the customer experience at all of Sears Holdings' touch points, we are starting with the basics and working with our associates to drive the culture shift necessary to become a great retail company."
The statements of operations for the 13 weeks ended April 29, 2006 are not comparable to the prior year period because the prior year period includes the results of Sears, Roebuck and Co. ("Sears") only for the period subsequent to March 24, 2005, the date of its acquisition by Kmart Holding Corporation ("Kmart"). In order to provide a comparable performance measure for the combined Company, pro forma results for the prior year period have been presented as though Kmart and Sears had been combined as of the beginning of fiscal 2004. On a pro forma basis, the Company's income before the cumulative effect of the accounting change in the first quarter of fiscal 2005 was $12 million, or $0.07 per diluted share.
First Quarter Revenues and Comparable Store Sales
Domestic comparable stores sales declined 4.8% in the aggregate, with Sears Domestic comparable store sales declining 8.4% and Kmart comparable store sales declining 0.2%. The decline in Kmart comparable store sales for the quarter was primarily due to lower transaction volumes within home goods partially offset by increased sales in apparel and within food and other consumable goods categories. Sears Domestic comparable store sales results reflect declines across all categories and formats except within home appliances, which generated a modest comparable store sales increase.
Total revenues increased $4.4 billion to $12.0 billion for the 13 weeks ended April 29, 2006, as compared to total revenues of $7.6 billion for the 13 weeks ended April 30, 2005. The increase during the 13-week period ended April 29, 2006 was primarily attributable to the inclusion of Sears for the full 13-week period ended April 29, 2006. Sears revenues were $7.7 billion for the 13 weeks ended April 29, 2006 as compared to $3.1 billion for the 13 weeks ended April 30, 2005, which period only includes the results of Sears subsequent to March 24, 2005, the date of its acquisition by Kmart. Total revenues at Kmart declined $0.3 billion as compared to the prior year period, primarily reflecting a reduction in the total number of Kmart stores in operation.
Operating Income
Operating income was $331 million for the 13 weeks ended April 29, 2006, as compared to $151 million for the 13 weeks ended April 30, 2005. The increase in operating income was due to an increase of $135 million of Sears Domestic operating income, as well as a $47 million increase in Kmart operating income mainly due to lower expenses as a result of realizing merger synergies and improved expense management.
On a pro forma basis, operating income improved $231 million from $100 million in the prior year period to $331 million, primarily due to a reduction of selling and administrative costs which decreased from $3,040 million (23.8% of revenues) last year to $2,721 million (22.7% of revenues) this year. On a pro forma basis, revenues declined from $12.8 billion last year to $12.0 billion this year mainly due to the domestic comparable store sales decline of 4.8% as noted above. The decline in comparable store sales was largely offset by an improvement in gross margin rate to 27.8% this year, an increase of 140 basis points from the prior year rate.
Financial Position
The Company's cash and cash equivalents balance is $3.2 billion at April 29, 2006 as compared to $1.9 billion at April 30, 2005 and $4.4 billion at January 28, 2006. The decline in cash from fiscal 2005 year end is due to the funding of seasonal working capital requirements and share repurchases.
Holdings' inventory level at April 29, 2006 was approximately $9.6 billion, as compared to $9.5 billion as of April 30, 2005. The increase reflects higher inventory in Kmart apparel and Sears Domestic hardlines businesses, partially offset by a reduction in Sears apparel inventory. Merchandise payables were $3.6 billion at April 29, 2006, as compared to $3.7 billion as of April 30, 2005.
Share Repurchase
During the first quarter of 2006, the company repurchased 3.3 million common shares at a total cost of $413 million, or an average price of $125.65 per share. As of April 29, 2006, the Company had remaining authorization to repurchase $497 million of common shares under its existing share repurchase program approved by the board of directors. The remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.
Pro Forma Adjusted EBITDA
For purposes of evaluating operating performance, the Company's management uses a Pro Forma Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Pro Forma Adjusted EBITDA") measurement computed as operating income appearing on the statement of operations less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude certain merger-related costs and restructuring charges. Pro Forma Adjusted EBITDA is used by management to evaluate the operating performance of the Company's businesses for comparable periods. Pro Forma Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP financial measures as well in managing the Company's businesses.
While Pro Forma Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:
-- EBITDA excludes the effects of financing and investing activities by
eliminating the effects of interest and depreciation costs;
-- Management considers merger transaction costs to result from
extraordinary activities that are not part of normal operations;
-- Restructuring activities, while periodically affecting the Company's
results, may vary significantly from period to period and have a
disproportionate effect in a given period, which affects the
comparability of results; and
-- Management considers gains/(losses) on the sale of assets to result
from investing decisions rather than ongoing operations.
Pro Forma Adjusted EBITDA is determined as follows:
13 Weeks Ended
April 29, April 30,
2006 2005
Pro Forma
Operating income per statement of operations $331 $100
Plus depreciation and amortization 289 283
Less gain on sales of assets (17) (7)
Before excluded items 603 376
Merger transaction costs - 34
Restructuring charges 9 3
Pro Forma Adjusted EBITDA as defined $612 $413
% to revenues 5.1% 3.2%
Pro Forma Adjusted EBITDA for the Company's domestic (United States operations) and Sears Canada operations is as follows:
13 Weeks Ended
Pro Forma Adjusted
EBITDA % To Revenues
April 29, April 30, April 29, April 30,
2006 2005 2006 2005
Pro Forma Pro Forma
Domestic operations $574 $364 5.2% 3.1%
Sears Canada 38 49 3.6% 4.6%
Total Pro Forma Adjusted
EBITDA $612 $413 5.1% 3.2%
Quarterly Report on Form 10-Q
The Company plans to file with the SEC its Quarterly Report on Form 10-Q for the first quarter 2006 on or before June 8, 2006. The Company elected to report its first quarter results in advance of the filing of this report in order to provide information to its shareholders closer to the quarter end.
Forward-Looking Statements
Results are preliminary and unaudited. This press release contains forward-looking statements about the Company's goals. Forward-looking statements are subject to risks and uncertainties that may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements include, but are not limited to, statements about the expected benefits of the business combination of Sears and Kmart and future financial and operating results. Such statements are based upon the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties. Risks and uncertainties include the possibility that we fail to offer products and services that satisfy the desires of our customers, whose preferences may change in the future, or other factors outside the control of Holdings. Actual results may differ materially from those set forth in the forward- looking statements. The Company intends the forward-looking statements to speak only as of the time made and does not undertake to update or revise them as more information becomes available.
About Sears Holdings Corporation
Sears Holdings Corporation is the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. The company is the nation's largest provider of home services, with more than 13 million service calls made annually. For more information, visit Sears Holdings' website at .
Sears Holdings Corporation
Statement of Operations
(Unaudited)
13 Weeks Ended
Reported Pro forma
millions, except per common share data April 29, April 30, April 30,
2006 2005 2005
REVENUES
Merchandise sales and services $11,998 $7,617 $12,668
Credit and financial products
revenues - 9 95
Total revenues 11,998 7,626 12,763
COSTS AND EXPENSES
Cost of sales, buying and occupancy 8,665 5,655 9,327
Gross margin rate 27.8% 25.8% 26.4%
Selling and administrative(1) 2,721 1,715 3,040
Selling and administrative expense
as a percentage of total revenues 22.7% 22.5% 23.8%
Depreciation and amortization 289 107 283
Provision for uncollectible credit
card accounts(1) - 1 17
Gain on sales of assets (17) (6) (7)
Restructuring charges(1) 9 3 3
Total costs and expenses 11,667 7,475 12,663
Operating income 331 151 100
Interest expense, net 47 42 75
Bankruptcy-related recoveries (1) (17) (17)
Other income (11) (9) (19)
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle 296 135 61
Income taxes 118 52 41
Minority interest (2) 2 8
Income before cumulative effect of
change in accounting principle 180 81 12
Cumulative effect of change in
accounting principle (net of income
tax benefit of $58) - (90) (90)
NET INCOME (LOSS) $180 $(9) $(78)
EARNINGS (LOSS) PER COMMON SHARE
Diluted earnings per share before
cumulative effect of change in
accounting principle $1.14 $0.65 $0.07
Diluted earnings (loss) per share $1.14 $(0.07) $(0.48)
Diluted weighted average common
shares outstanding 158.0 124.8 164.8
(1) The provision for uncollectible credit card accounts and restructuring
charges were presented in selling and administrative expense in the
fiscal 2005 first quarter Form 10-Q.
Sears Holdings Corporation
Balance Sheets
(Unaudited)
millions April 29, April 30, January 28,
2006 2005 2006
ASSETS
Current assets
Cash and cash equivalents $3,182 $1,882 $4,440
Credit card receivables - 1,051 -
Account receivable 734 638 811
Merchandise inventories 9,581 9,476 9,068
Prepaid expenses, deferred charges
and other current assets 512 581 372
Deferred income taxes 590 574 516
Total current assets 14,599 14,202 15,207
Property and equipment, net 9,500 10,141 9,823
Goodwill 1,792 2,057 1,684
Tradenames and other intangible assets 3,453 3,866 3,448
Other assets 573 630 411
TOTAL ASSETS $29,917 $30,896 $30,573
LIABILITIES
Current liabilities
Short-term borrowings $134 $246 $178
Current portion of long-term debt
and capitalized lease obligations 215 748 570
Merchandise payables 3,634 3,660 3,458
Income taxes payable 427 464 449
Other current liabilities 3,796 3,298 3,917
Unearned revenues 1,155 1,103 1,047
Other taxes 646 708 731
Total current liabilities 10,007 10,227 10,350
Long-term debt and capitalized lease
obligations 3,510 3,438 3,268
Pension and postretirement benefits 2,392 2,607 2,421
Minority interest and other
liabilities 2,633 3,463 2,923
Total Liabilities 18,542 19,735 18,962
SHAREHOLDERS' EQUITY
Preferred stock, 20 shares
authorized; no shares outstanding - - -
Common stock 2 2 2
Capital in excess of par value 10,266 9,907 10,258
Retained earnings 2,377 1,331 2,198
Treasury stock - at cost (1,057) (6) (642)
Accumulated other comprehensive loss (213) (73) (205)
Total Shareholders' Equity 11,375 11,161 11,611
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $29,917 $30,896 $30,573
Total common shares outstanding 156.5 164.9 159.8
Sears Holdings Corporation
Segment Results
For the 13 Weeks Ended April 29, 2006 and April 30, 2005
(Unaudited)
2006 - Reported
millions Sears
Sears
Kmart Domestic Canada Holdings
Merchandise sales and services
revenue $4,254 $6,697 $1,047 $11,998
Cost of sales, buying and occupancy 3,241 4,661 763 8,665
Gross margin rate 23.8% 30.4% 27.1% 27.8%
Selling and administrative(1) 855 1,620 246 2,721
Selling and administrative expense as
a percentage of total revenues 20.1% 24.2% 23.5% 22.7%
Depreciation and amortization 15 240 34 289
Gain on sales of assets (17) - - (17)
Restructuring charges(1) 4 - 5 9
Total costs and expenses 4,098 6,521 1,048 11,667
Operating income (loss) $156 $176 $(1) $331
Number of:
Kmart Stores 1,400 - - 1,400
Full-Line Stores - 935 123 1,058
Specialty Stores - 1,112 254 1,366
Total Stores 1,400 2,047 377 3,824
2005 - Reported
millions Sears
Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,522 $3,001 $94 $7,617
Credit and financial products
revenues - - 9 9
Total revenues 4,522 3,001 103 7,626
Cost of sales, buying and occupancy 3,462 2,124 69 5,655
Gross margin rate 23.4% 29.2% 26.6% 25.8%
Selling and administrative(1) 944 744 27 1,715
Selling and administrative expense as
a percentage of total revenues 20.9% 24.8% 26.2% 22.5%
Depreciation and amortization 10 92 5 107
Provision for uncollectible credit
card accounts(1) - - 1 1
Gain on sales of assets (6) - - (6)
Restructuring charges(1) 3 - - 3
Total costs and expenses 4,413 2,960 102 7,475
Operating income (loss) $109 $41 $1 $151
Number of:
Kmart Stores 1,479 - - 1,479
Full-Line Stores - 879 122 1,001
Specialty Stores - 1,161 218 1,379
Total Stores 1,479 2,040 340 3,859
2005 - Pro Forma
millions Sears
Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,522 $7,171 $975 $12,668
Credit and financial products
revenues - - 95 95
Total revenues 4,522 7,171 1,070 12,763
Cost of sales, buying and occupancy 3,462 5,142 723 9,327
Gross margin rate 23.4% 28.3% 25.8% 26.4%
Selling and administrative(1) 944 1,815 281 3,040
Selling and administrative expense as
a percentage of total revenues 20.9% 25.3% 26.3% 23.8%
Depreciation and amortization 10 234 39 283
Provision for uncollectible credit
card accounts(1) - - 17 17
Gain on sales of assets (6) (1) - (7)
Restructuring charges(1) 3 - - 3
Total costs and expenses 4,413 7,190 1,060 12,663
Operating income (loss) $109 $(19) $10 $100
(1) The provision for uncollectible credit card accounts and restructuring
charges were presented in selling and administrative expense in the
fiscal 2005 first quarter Form 10-Q.
Sears Holdings Corporation
Pro Forma Adjusted EBITDA
13 Weeks Ended
April 29, 2006 April 30, 2005
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Pro Pro Pro
Forma Forma Forma
Operating income
per statement
of operations $332 $(1) $331 $90 $10 $100
Plus depreciation
and amortization 255 34 289 244 39 283
Less gain on sale
of assets/
businesses (17) - (17) (7) - (7)
Before excluded
items 570 33 603 327 49 376
Merger transaction
costs - - - 34 - 34
Restructuring
charges 4 5 9 3 - 3
Pro Forma Adjusted
EBITDA as defined $574 $38 $612 $364 $49 $413
% to revenues 5.2% 3.6% 5.1% 3.1% 4.6% 3.2%
Sears Holdings Corporation
Pro Forma Reconciliation
The following tables provide a reconciliation from the as reported
results to the pro forma results presented for Sears Holdings, Sears
Domestic and Sears Canada for the 13-week period ended April 30, 2005.
Sears Holdings
13-week period ended April 30, 2005
millions, except per Pre-
common share data As merger Purchase Pro
reported Activity Accounting Forma
Merchandise sales and services $7,617 $5,051 $ - $12,668
Credit and financial products
revenues 9 86 - 95
Total revenue 7,626 5,137 - 12,763
Cost of sales, buying and occupancy 5,655 3,672 - 9,327
Selling and administrative(1) 1,715 1,314 11 3,040
Depreciation and amortization 107 147 29 283
Provision for uncollectible credit
card accounts(1) 1 16 - 17
Gain on sales of assets (6) (1) - (7)
Restructuring charges(1) 3 - - 3
Total costs and expenses 7,475 5,148 40 12,663
Operating income (loss) 151 (11) (40) 100
Interest (expense) income, net 42 35 (2) 75
Bankruptcy-related recoveries (17) - - (17)
Other income (9) (10) - (19)
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle 135 (36) (38) 61
Income tax expense (benefit) 52 4 (15) 41
Minority interest 2 6 - 8
Income before cumulative effect of
change in accounting principle 81 (46) (23) 12
Cumulative effect of change in
accounting principle, net of tax (90) - - (90)
NET INCOME (LOSS) $(9) $(46) $(23) $(78)
Sears Domestic
13-week period ended April 30, 2005
Pre-
millions As merger Purchase Pro
reported Activity Accounting Forma
Merchandise sales and services
revenue $3,001 $4,170 $ - $7,171
Cost of sales, buying and occupancy 2,124 3,018 5,142
Selling and administrative 744 1,060 11 1,815
Depreciation and amortization 92 116 26 234
Gain on sales of assets - (1) - (1)
Total costs and expenses 2,960 4,193 37 7,190
Operating income (loss) $41 $(23) $(37) $(19)
Sears Canada
13-week period ended April 30, 2005
Pre-
millions As merger Purchase Pro
reported Activity Accounting Forma
Merchandise sales and services $94 $881 $- $975
Credit and financial product revenues 9 86 - 95
Total revenues 103 967 - 1,070
Cost of sales, buying and occupancy 69 654 - 723
Selling and administrative(1) 27 254 - 281
Depreciation and amortization 5 31 3 39
Provision for uncollectible credit
card accounts(1) 1 16 - 17
Gain on sales of assets - - - -
Restructuring charges(1) - - - -
Total costs and expenses 102 955 3 1,060
Operating income (loss) $1 $12 $(3) $10
(1) The provision for uncollectible credit card accounts and restructuring
charges were presented in selling and administrative expense in the
fiscal 2005 first quarter Form 10-Q.
SOURCE: Sears Holdings Corporation
CONTACT: News Media, Sears Holdings Public Relations, +1-847-286-8371
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